Mês: December

_the december│2022 edition of our Newsletter has the following highlight:

– CVM changes its position regarding votes in conflict-of-interests

– Crypto currencies law is sanctioned

– DREI discloses letter regarding publishing of financial statements of large sized companies

– Revocation of the need for electronic publications to be made available on the website of closely held companies

_CVM changes its position regarding votes in conflict-of-interests

The Brazilian Securities and Exchange Commission (“CVM”) changed its position on shareholder voting in conflict-of-interest situations after two recent decisions: CVM PAS No. 1957.004392/2020-67, which analyzed the regularity of the procedure for sales of companies controlled by a listed company to its controlling shareholders, and CVM PAS No. 19957.003175/2020-50, which analyzed the legality of votes cast by the controlling shareholders of a listed company in a resolution concerning the company’s capital increase.

Pursuant to Article 115 of Law 6,404/1976, as amended (“Brazilian Corporate Law”), a vote cast by a shareholder with the aim of causing damage to the company or other shareholders, or to obtain, for himself or for others, an advantage to which he/she is not entitled and which results, or may result, in damage to the company or to other shareholders is considered abusive. Paragraph 1 of this article establishes situations in which the shareholder must refrain from exercising his right to vote: approval of the appraisal report of assets with which to contribute to the formation of the share capital; approving your own accounts as an administrator; deliberations that may benefit him in a particular way, or in which he has conflicting interests with the company’s.

Regarding managers, article 156 of the Brazilian Corporate Law forbids the intervention of the manager in a transaction in which he/she has a conflicting interest with the company, as well as in the decision taken by the other managers.

In the recent decision aforementioned, by majority of CVM’s board, the theory of the “material” conflict of interests prevailed, by which it is necessary to analyze the merits of the resolution taken by a shareholder or manager who has conflicting interests with the company to determine whether the vote in question should be annulled, there is no need to be prevented from voting before such verification. Previously, the theory of the “formal” conflict of interests was dominantly adopted by CVM, which prohibits the vote of a shareholder or manager in such situations.

The current position adopted by CVM is based on a systematic interpretation of the Brazilian Corporate Law and in the principle of good faith of the shareholder and/or manager. As the validity control of these votes is therefore a posteriori, the new understanding requires the shareholder to justify his vote and demonstrate that the decision was considerate and taken in accordance with the company’s best interests, under the risk of being declared null and void.

Director Flávia Perlingeiro presented dissenting votes in both proceedings regarding the applicability of the theory of the “material” conflict of interest but highlighted that both theories (material and formal) present insufficiencies and inadequacies for a clear legal treatment of the matter in Brazil.

CVM’s president informed, following the decisions mentioned above, that CVM will work on a guidance opinion on the matter. The objective is not to determine which theory is applicable for the interpretation of conflict of interests, but to clarify whether the shareholder with a potential conflict of interest will be able to vote, if duly prepared and with proper justifications.

We contributed on this subject in an article published in the Legislação & Mercado section of Capital Aberto on December 01, 2022, which can be accessed in Portuguese through the link bellow:

https://legislacaoemercados.capitalaberto.com.br/mudanca-da-cvm-demanda-cuidados-das-companhias/

_Crypto currencies law is sanctioned

Bill of Law Bill 4401/2021, also known as the legal landmark of crypto currencies, was sanctioned on December 22, 2022 and became Law No. 14.478, which will enter into force in 180 days.

The law considers as a virtual asset a digital representation of values that can be traded or transferred by electronic means and used to make payments or for investment purposes. Traditional currencies, foreign currencies, points, and rewards from rewards programs are excluded from the definition, as well as securities and financial assets that already have specific regulation.

In addition to guidelines to rendering services with crypto assets, the following matters of the law stand out:

• provision for appointment, by the Executive Branch, of a body or entity of the federal public administration that will be responsible for the supervision and establishment of parameters for the performance of crypto asset service providers.
• inclusion of a new criminal type of fraud in the Penal Code (Fraud with the use of virtual assets, securities, or financial assets).
• equivalence of the legal entity that offers services related to operations with virtual assets, including intermediation, negotiation or custody to financial institutions, for the purposes of the White-Collar Law (Law No. 7,492/1986)
• inclusion of an aggravating factor for repeated crimes committed through virtual assets in the Money Laundering Law (Law No. 9.613/1998).

Despite representing a milestone for the legislation on the provision of virtual assets and for the regulation of crypto asset service providers in Brazil, specific rules on the matter still depend on the regulation to be issued by the future body or entity appointed for this purpose.

Law No. 14.478 can be accessed in Portuguese through the link below:

https://www.in.gov.br/en/web/dou/-/lei-n-14.478-de-21-de-dezembro-de-2022-452739729

_DREI discloses letter regarding publishing of financial statements of large sized companies

On November 25, 2022, the Brazilian National Department of Business Registration and Integration (“DREI“) published the Letter SEI No. 4742/2022 (“DREI Letter“) regarding the disclosure of legal publications required for large sized limited liability companies or group of companies under common control, understood as those having total assets exceeding 240 million Brazilian Reais in the previous fiscal year or annual gross revenues exceeding 300 million Brazilian Reais .

Law No. 11.638, of December 15, 2007, determines that the provisions of the Brazilian Corporate Law apply to large sized companies regarding bookkeeping and preparation of financial statements and the obligation of an independent audit by an auditor registered with CVM. For this reason, some Boards of Trade considered that these companies would also be obliged to publish their financial statements under the terms set forth in the Brazilian Corporate Law, which was subject of great debate, including in the judicial sphere.

The DREI Official Letter confirms and reiterates that the publication of financial statements by large sized companies is optional and mentions that Boards of Trade shall accept such understanding, so that the filing of corporate acts of such companies are not rejected, under the allegation of non-compliance with the aforementioned publications.

DREI Letter SEI No. 4742/2022 can be accessed in Portuguese through the link below:

https://www.gov.br/economia/pt-br/assuntos/drei/legislacao/arquivos/oficios-circulares-drei/2022/SEI_29794658_Oficio_Circular_4742.pdf

_Revocation of the need for electronic publications to be made available on the website of closely held companies

On December 1^st, 2022, ordinance No. 10,031 of the Ministry of Economy (“Ordinance”), came into force, revoking Paragraph 2 of article 1 of Ordinance No. 12,071/2021, also from the Ministry of Economy, which provided for the obligation of closely held companies with annual gross revenues of up to 78 million Brazilian Reais to disclose publications and other documents on their own website, pursuant to article 294 of the Brazilian Corporate Law.

With the revocation, only the requirement for electronic publications and disclosure of the acts of closely-held companies, as provided for in the Brazilian Corporation Law, with annual gross revenues of up to 78 million Brazilian Reais through the “Central de Balanços do Sistema Público de Escrituração Digital – SPED” is maintained.

The Ordinance can be accessed in Portuguese through the link below:

http://normas.receita.fazenda.gov.br/sijut2consulta/link.action?idAto=127389

_the december│2021 edition of our Newsletter has the following highlight:

– Understanding the Shareholders’ Agreement: Strategies for Preventing Deadlocks

–2021 was marked by progress in reducing bureaucracy in business activity and simplifying its procedures NEWSLETTER Dec 2021

_Understanding the Shareholders’ Agreement: Strategies for Preventing Deadlocks

As a rule, shareholders’ agreements contain clauses for the resolution of deadlocks in order to define means for the resolution of conflicts among the shareholders of a company, mitigating possible risks and losses in the development of its activities. Considering that there are several ways to solve impasses, the provision of a resolution clause depends on the analysis of the context in which the company is inserted and the peculiarity of each case.

Among the commonly adopted methods of resolving impasses, we find more lenient and agile mechanisms such as negotiation, mediation and conciliation, in which conflict decisions are made by the parties themselves. On the other hand, there are more rigorous alternatives such as arbitration and judicial clauses, which depend on a third party to solve the deadlock and usually extend over a longer period of time and are considerably more expensive.

There are also other practices, known in North American law as “deadlock provisions”, which may be applied in Brazilian law, although there is no specific provision regulating such means of solutions in our legislation. In this context, we have the “buy or sell” or “shotgun” clauses, which consist in call and put option clauses. They are used in certain deadlock situations and their purpose is to put an end to the partnership by means of the withdrawal of one of the shareholders according to a pre-agreed mechanism. These clauses can have different mechanisms depending on the interests and characteristics of the parties involved and their partnership.

The most common “shot-gun” mechanism is known as “Russian Roulette”, in which any shareholder (“offeror”) has the right to make a bid to sell his shares to another shareholder (“offeree”) or to buy the offeree’s shares at a certain price and the offeree must choose between buying the offeror’s shares or selling his shares to him under the terms of the bid.

Shotgun mechanisms do not always work for all situations and need to be carefully thought out and adapted to each specific situation in order to ensure their effectiveness. For instance, when there is a difference in assets between the parties, this may result in a negotiating disadvantage for the less favored party in triggering a shotgun clause. In these situations, it is common to adjust standard clauses to provide for mechanisms that can minimize this disadvantage, as it is the case with the so-called “Fairest Sealed Bid”, whereby, instead of the traditional pricing structure of a clause such as the Russian Roulette, each party puts its respective price proposal per share in an envelope and an independent third party will evaluate which proposal is closest to the market value of the share for purposes of applying the shotgun clause.

In Brazil, due to a cultural issue and to our property tradition in relation to the ownership of company’s shares, there is still some resistance in adopting “shotgun” mechanisms in shareholders’ agreements involving family companies. In fact, it is not uncommon to face situations where, due to the characteristics and interests of the parties, the clauses to solve impasses in relation to family companies end up being clauses that foresee phased negotiation structures and, in the absence of an agreement, the maintenance of the status quo.

Nevertheless, the scenario and characteristics of each company and its shareholders must always be analyzed to define the best conflict resolution mechanism to be used in each case.

The text above was published in legislation and market session of Capital Aberto on December 09, 2021, and can be accessed in Portuguese through the link below:

https://legislacaoemercados.capitalaberto.com.br/entendendo-o-acordo-de-acionistas-estrategias-para-prevencao-de-impasses/

_2021 was marked by progress in reducing bureaucracy in business activity and simplifying its procedures NEWSLETTER Dec 2021

This year, the sanction of Law 14.195/2021, resulting from the Provisional Measure (MP) 1.040/2021, stands out as a major step towards reducing bureaucracy in business activity in Brazil. This Law has as its main objective the reduction and simplification of procedures required for starting a business in the country. It has a goal of fostering economic growth, reducing complexity and time needed to open new businesses, in addition to enabling a greater attraction of foreign investment throughout of the coming years.

An important change related to this simplification is the waiver of notarization in corporate acts to be registered with the boards of trade, including powers of attorney.

Also, among other measures, we highlight:

• Corporate name. (i) possibility for the businesspersons or legal entity to choose to use the National Registry of Legal Entities (CNPJ) number as a corporate name; (ii) end of the protection of the corporate name of a company without movement for ten years.
• Simplifying the setting up business. Reform of the existing system of the National Network for Simplification of Registration and Legalization of Companies and Businesses (“REDESIM”), which, through its website, provide users, free of charge, research on the registration steps, change and termination of business individuals and legal entities.
• Virtual Address. Possibility of registering entrepreneurs and legal entities without a physical establishment.
• Risk assessment of the company’s activities. For companies that carry out an activity classified as medium risk, the business license and licenses will be issued automatically, without human analysis – as already happen in the case of low-risk companies.
• Electronic Books. Closed companies are entitled to replace certain physical corporate books for electronic registers.
• Archiving of Original Corporate Documents. The boards of trade will be able to eliminate any scanned and digitally archived corporate acts and documents. Before deletion, the company, through its partner, director, attorney or other interested parties, has a period of 30 days to remove the original document at no additional cost.
• Integrated Asset Recovery System. Institution of the Integrated Asset Recovery System (Sira), comprising a set of instruments, mechanisms and initiatives designed to facilitate the identification and location of assets and debtors, as well as the restriction and sale of assets. The system aims to improve the effectiveness and efficiency of asset recovery actions.

_the December│2020 edition of our Newsletter has the following highlights:

– Brazilian Securities and Exchange Commission accepts Term of Commitment with Officer that traded shares during the blackout period

– Administrative Tax Appeals Council decides that Corporate Income Tax does not apply to property exchange transactions

– Brazilian National Department of Business Registration and Integration opens public consultation on corporate and accounting books exclusively in digital form

_ Brazilian Securities and Exchange Commission accepts Term of Commitment with Officer that traded shares during the blackout period

On November 10^th, 2020, the Board of the Brazilian Securities and Exchange Commission (“CVM“) accepted the Term of Commitment Committee’ opinion (“CTC“) in the Administrative Proceeding CVM SEI 19957.006799/2019-95 to enter into the term of commitment presented by an officer of a publicly-held company. The officer agreed to pay in a single installment BRL120,000.00 (one hundred and twenty thousand reais) in benefit of the securities market as a result of the negotiation of preferred shares issued by the company in possession of relevant information not yet disclosed to the market.

This proceeding was initiated after CVM’s Superintendence of Relations with Companies (“SEP“) verified the sale of preferred shares by such officer in a period immediately prior to the disclosure of the company’s third quarter information of 2018, in violation of art. 13 of CVM Instruction 358/2002 (“ICVM 358“).

In his defense, the officer informed that he traded such preferred shares according to the blackout period informed by the company’s compliance area, with the sole purpose of obtaining liquidity. He also claimed that there was no capital gain from the operation.

However, SEP pointed out that the officer carried out said trade of shares on the first day of the blackout period applicable to the disclosure of its quarterly financial statements, as set forth in the company’s corporate events calendar. In addition, SEP also mentioned that regardless of the objective term of the blackout period set forth in paragraph 4 of art. 13 of ICVM 358 (15-day period prior to the disclosure of quarterly and annual financial statements), in which share trading is prohibited by those who are aware of the content of the company’s financial statements prior to its disclosure, which, according to the company, occurred with the officer in question.

Prior to drawing up the officers’ indictment, he presented a proposal to enter into a Term of Commitment with the payment of BRL15,000.00 (fifteen thousand reais), considering that such amount would exceed the triple of the benefit he earned with said transaction, in his accounts. The CTC, considering the minimum amount in other terms of commitment, the phase in which the proceeding was at and the fact it was the officers’ first infraction, presented a counterproposal in the amount of BRL120,000.00 (one hundred and twenty thousand reais), to be paid in a single installment. Although the officer first proposed to pay such amount in four installments, he later agreed with the CTC counterproposal, which was accepted by CVM’s Board.

More information on the case, may be accessed through the link below (in Portuguese only):

http://www.cvm.gov.br/export/sites/cvm/noticias/anexos/2020/20201110_PA_CVM_SEI_19957_006799_2019_95_parecer_comite_termo_de_compromisso.pdf

_Administrative Tax Appeals Council decides that Corporate Income Tax does not apply to property exchange transactions

On November 10^th, 2020, the last instance of the Administrative Tax Appeals Council (“Carf”), Superior Chamber on Tax Revenue (“CSRF”), decided on proceeding No. 11080.001020/2005-94, stating the corporate income tax (“IRPJ”) should not be imposed on real estate exchange transactions between companies in the taxation system of the presumed profit.

According to the Brazilian Federal Revenue, exchange transactions shall be totally taxed, since they are part of the gross revenue of legal entities. The reporting counselor of the proceeding, Edeli Pereira Bessa, agreed with said understanding, however she had a losing vote. The reporting counselor understands that the exchange may be compared to a purchase and sale transaction, which means the entire revenue shall be subject to taxation by the IRPJ.

On the other hand, according to counselor Caio Cesar Nader Quintella, who cast the winning vote, the exchange and purchase and sale transactions cannot be compared, since they have different natures, so that the values of said transaction are not part of real estate revenue. Quintella pointed out that exchange transactions create mobility for players and take place within the scope of exchanging assets of the same value. By taxing an exchange transaction and afterwards selling the property, there is a double taxation for the taxpayer, since it will also be taxed when selling the property.

Finally, the Superior Court of Justice (STJ) has also expressed its opinion on the matter when judging REsp No. 1733560/SC, in which the reporting Minister Herman Benjamin understood that the concept of sales revenue does not include the exchange transaction.

More information on the CARF proceeding No. 11080.001020/2005-94 and judgment of REsp No. 1733560/SC, may be accessed in Portuguese at:

https://carf.fazenda.gov.br/sincon/public/pages/ConsultarJurisprudencia/listaJurisprudencia.jsf?idAcordao=4697539

https://processo.stj.jus.br/processo/revista/documento/mediado/?componente=ATC&sequencial=82795997&num_registro=201800765116&data=20181121&tipo=5&formato=PDF

_Brazilian National Department of Business Registration and Integration opens public consultation on corporate and accounting books exclusively in digital form

The Brazilian National Department of Business Registration and Integration (“DREI“) opened a public consultation on November 27^th, 2020 regarding the authentication of the terms of opening and closing of accounting books and others books of individual businessmen, individual limited liability companies (“EIRELIs“), companies and auxiliary agents of commerce (DREI 03/2020).

According to the normative instruction’s draft presented for discussion, bookkeeping instruments, corporate books and books of auxiliary agents of commerce must be exclusively digital, being produced or launched on electronic platforms, stored or not on the servers of the boards of trade. Their opening and closing terms shall be signed by the entrepreneur or its attorney-in-fact, if applicable, and the accountant, via digital certificate or any other means of proof of authorship and integrity of documents in electronic form.

In this sense, the normative instruction’s draft points out that the boards of trade shall only verify the extrinsic formalities of the data presented in the opening and closing terms, being the companies and the accountants responsible for the content of such books. Moreover, the authentication of these terms must be granted automatically when the interested party (i) signs a declaration that it has fulfilled all legal formalities and (ii) presents to the board of trade the receipt of the payment form. Furthermore, such draft reinforces that it is not within the competence of the boards of trade to verify the sequence of the books’ order number and its period of bookkeeping – thus, it is possible to authenticate a book regardless of the presentation of the previously authenticated books to the board. In addition, the books and financial statements for previous periods may be signed by those responsible for the period to which the bookkeeping refers to or by those currently responsible.

The Public Consultation DREI 03/2020 will be open until December 14^th, 2020 for comments and suggestions. More information may be accessed through the link below (in Portuguese only):

https://www.gov.br/economia/pt-br/assuntos/drei/consultas-publicas/consultas-abertas

_ the December │ 2019 edition of our Newsletter has the following highlights:

– Brazilian Securities and Exchange Commission discharges members of the Board of Directors on a charge of non-compliance with the duty of diligence

– Brazilian Securities and Exchange Commission rules on a case of alleged irregularity in the appointment of member of the audit committee

_ Brazilian Securities and Exchange Commission discharges members of the Board of Directors on a charge of non-compliance with the duty of diligence

 On November 19^th, 2019, the Brazilian Securities and Exchange Commission (“CVM”) decided on the Administrative Proceeding CVM RJ2016 / 7197 (SEI No. 19957.005981 / 2016-86) (“PAS”), filed by the Business Relations Superintendence (“SEP” or “Prosecution”) to ascertain the liability of members of the board of directors of a publicly held corporation (“Company”) for not acting with care and diligence in the exercise of their attributions, in violation of article 153 of Law No. 6.404/76 (“Brazilian Corporate Law”).

According to CVM Director Carlos Alberto Rebello Sobrinho, the PAS was due to a complain regarding the decision taken by the member of the board of directors (“Defendants”), which declared the Share Subscription Option and Other Covenants Agreement (“Option”) entered into by and between the Company and its controlling shareholder to be not enforceable.

The Option granted the Company the right to demand the subscription by the controlling shareholder of common shares issued by the Company at a subscription price of R$ 6.30 to US$ 1 billion. The Option was exercised by the Company’s board of officers, which required the controlling shareholder to immediately pay the amount of US$ 100 million. However, on the same date, the controlling shareholder sent the Company a conflict notice questioning the validity of the exercise of the Option and starting an amicable settlement procedure, as previously agreed on in the option agreement. Afterwards, it was established that the dispute would be settled upon the conclusion of a legal opinion to be rendered by 3 independent legal experts or until one of the parties amicably ended the discussion.

The legal experts concluded that the Option was unenforceable due to the non-implementation of the suspensive condition provided in the agreement. Therefore, at a meeting of the board of directors of the Company, the Defendants unanimously and unreservedly decided to close the dispute regarding the exercise of the Option, declaring it to be unenforceable, based on the legal opinions, giving full discharge to the controlling shareholder.

As pointed out by SEP, the Defendants disregarded several relevant matters, such as the fact that it was not clear which pieces of information were provided to the legal experts in order for them to prepare the legal opinion. Furthermore, the Prosecution added that due to the decision to declare the Option unenforceable and to release the controlling shareholder of its obligations under the agreement, the efforts to satisfy the Company’s rights had not been exhausted, as the dispute was not submitted to arbitration, as provided for in the agreement. Thus, SEP understood that the Defendants’ decision was not taken diligently.

The Defendants did not agree with SEP, arguing that their decision was based on the legal opinions issued by legal experts, which, unanimously, concluded that the Option was unenforceable. Furthermore, they argued that, given the non-implementation of the suspensive condition, there would be no room for any attempt to negotiate with the controlling shareholder and that the costs and risks of bringing the matter to an arbitral decision could be damaging to the Company. Finally, the Defendants claimed that they decided the matter on an informed, thoughtful and disinterested manner, supported by the “right to rely on others”, without any indication that suggested the need for further investigation into the matter. In addition, the Defendants stated that their diligence should be assessed from the perspective of the “business judgment rule”, already consolidated by CVM’s case law.

At the end, CVM Board unanimously decided to discharge the Defendants from the charge of non-compliance with their duty of diligence. CVM Chairman, Marcelo Barbosa, took the opportunity to reinforce that it is important that managers have consistent documents and records to support their decisions, in order to demonstrate compliance with their duty of diligence.

More information on this precedent can be accessed in Portuguese at:

http://www.cvm.gov.br/noticias/arquivos/2019/20191119-3.html

_ Brazilian Securities and Exchange Commission rules on a case of alleged irregularity in the appointment of member of the audit committee

On November 26^th, 2019, CVM Board decided on the Administrative Proceeding No. SEI 19957.006822 / 2018-61 (“PAS 2018-61”), in which it was discussed whether a minority shareholder, a party in derivative contracts entered into with the Company’s controlling shareholder, could participate in the separate election of members of the company’s audit committee, pursuant to article 161, paragraph 4^th, of the Brazilian Corporate Law.

The technical department at CVM filed the claim because the minority shareholder, attending the company’s General Shareholders’ Meeting, had elected both effective and alternate members of the company’s audit committee by means of the separate voting procedure, surpassing the votes of the other minority shareholders qualified to participate in the said voting procedure.

On the technical department’s point of view, this minority shareholder and the controlling shareholder would have the same interest, since the financial agreements entered into between them had transferred the risk of the appreciation and devaluation of the shares issued by the company to the controlling shareholder. Therefore, when voting in the company’s General Shareholders Meeting, the minority shareholder (i) did not represent the interest of a proper minority shareholder and (ii) was, in fact, a mere extension of the will of the controlling shareholder.

In the judgment of PAS 2018-61, CVM Board ruled, by unanimity of votes, that the minority shareholder should not be prevented from voting in the separate voting procedure of members of the company’s audit committee, since THE FINANCIAL AGREEMENTS ENTERED INTO WITH THE CONTROLLING SHAREHOLDER DID NOT, BY THEMSELVES, REVEAL AN ARRANGEMENT BETWEEN THE PARTIES CAPABLE OF PORTRAYING AN IMPEDIMENT TO VOTE, GIVEN THAT, IN THIS CASE, IT WAS POSSIBLE TO VERIFY (I) THE EXPOSURE OF THE MINORITY SHAREHOLDER TO THE VARIATION OF THE SHARES’ PRICE, AN ESSENTIAL PARAMETER TO DETERMINE IF THERE IS POLITICAL INTEREST AND (II) THAT THE EXISTING POLITICAL INTEREST WAS DEEMED TO REPRESENT THE WILL OF A MINORITY SHAREHOLDER.

More information on this precedent can be accessed in Portuguese at:

http://www.cvm.gov.br/noticias/arquivos/2019/20191126-2.html#PAS_CVM_RJ2018_4585_SEI_19957_006822_2018_61_